Law of Contract| A discussion on the Restraint of Trade|| Introduction Business owners in an attempt to protect the goodwill of their business will often include “Restraint of trade” provision in employment agreements, sale of business agreements etc. Thus, an agreement, which someone is restricted in his freedom to carry on his trade, profession, business or other economic activity, is generally called an agreement in restraint of trade. Having said that, this paper is directed towards a brief and critical discussion on the concept of restraint of trade in which parties may find themselves.
It is based on a given scenario whereby the facts, the legal issues, legal principles, and application of the law to the facts would be discussed in the form of advice to Y jeopardise Facts The facts to the case are as follows: X an estate agents company, sought to restrain its former employee Y (who had worked very successfully for X for approximately 3years as an estate agent) from doing business on her own as an estate agent in the city of Windhoek. The restraint clause was in the form of a written contract of employment.
The restraint contract prevented Y from being involved in any way whatsoever in an estate agency or any business which was the same or similar to X’s estate agents company. Y was limited as to geographic area within 65 kilometres from Windhoek General Post Office, which also includes six other municipalities for a period of 2 years following the termination of Y’S employment as an employee. Legal Issues * Is there a legitimate interest of the employer (X) that deserves protection at the termination of the employment agreement by Y? * Whether the restraint is reasonable or not? Whether the use of Y’s general skills and knowledge would be in breach of the restraint of trade agreement, which Y knowingly signed? * Is it legal to have restrain clause in an employment contract? * What is the longest period that it can be applied to? Discussion Legal principles: From a common law perspective, the employment contract is a contract concluded between two equal parties to their mutual benefit. Here, the employer and employee voluntarily negotiate a contract that regulates their relationship, and this contract sets out their respective rights and duties.
Restraints in trade are commonly found in employment contracts whereby employees have a right in protecting themselves against competition from their employees during the employment relationship and after when the employment relationship is terminated for whatever reason. The objective of such a restrictive provision in the contract of employment is to limit the freedom of employees who would otherwise have to leave their employment and start a new business or work for another employer in competition with a former employer.
The Appellate Division has described the objects and purpose of a restraint of trade clause as follows: “The legitimate object of a restraint is to protect the employer’s goodwill and customer connections (or trade secrets) and the restraint accordingly remains effective for a specified period (which must be reasonable) after the employment relationship has come to an end. The need for the protection exists therefore independently of the manner in which the contract of employment is terminated and even if this occurs in consequence of a breach by the employer. An employee has an obligation in an employment contract to protect confidential information and trade secrets. The employee also has a duty to serve the interests of the employers’ business and a duty to avoid conflicts of interests. Confidential information and trade secrets are dependent upon relevant circumstances. The mere fact that a trader chooses to categorise something secret or confidential does not per se make it so. The information concerned must have the necessary quality of confidence, eaning it must not be something of public knowledge. Employees may use general skills and knowledge gained during employment once they leave, even if their new employer benefits from such knowledge and skills. It is an implied term of every contract that an employee will not use confidential information for his own benefit or for the detriment of his or her employer. The principle of freedom of trade emphasises the right to work and therefore contracts that restricts a person’s right to exercise his chosen vocation are unreasonable.
The principle of freedom to contract emphasises that parties should be free to enter into contracts that should be binding in accordance with the pacta servanda sunt principle in order that society may function properly. Restraint of Trade within the employment context is lawful as long as the extents of the limitation they impose is reasonable and are not against public policy. Societal concerns such as public interest are of essence in restraints of trade. If the restraint is to as restrictive of one of the parties as to conflict with public interest, it is then illegal and unenforceable.
The burden of proof is on the party (Y) who alleges that the contract is in unreasonable restraint of trade and this question of fact in the scenario taking in account the circumstances at the time when enforcement is sought. In the case of Magna Alloys and Research (SA) (Pty) Ltd v Ellis it was found that sanctity of a contract had greater precedent and that undertakings in restraint of trade were prima facie valid and unforeseeable unless the party seeking to avoid its obligations could show that restraint of trade was contrary to public interest.
Employers must also ensure that the duration of a restraint of trade is not excessively long and must have some connection with the period of the employees’ employment. The geographic demarcation must be reasonable and should have some connection with the area in which the employee will be operational. For the employee concerned, concluding a restraint of trade agreement on occasion has some form of financial advantage. The employee can be remunerated at a higher level during the course of employment or the employee can receive monetary compensation
Common misconceptions in respect of restraint of trade * Restraint of trade agreements are no longer enforceable i (hereinafter referred to as the Constitution) which provides that every citizen have the right to choose their trade, occupation or profession freely. * A restraint of trade is only enforceable if the employee is paid a restraint payment * Clauses in an employment agreement protecting the employer’s confidential information, trade secrets, intellectual property, and preventing an employee from soliciting customers or fellow employees, are also restraints in trade. Employees within the organisation must be requested to sign a restraint of trade agreement * If the employer unlawfully or unfairly terminates your employment agreement, then the restraint of trade becomes unforceable. Application 0f the law to the facts X is allowed to insert a restraint of trade clause in Y’s contract of employment. The restraint of trade should however be reasonable, as it should not be against public interest. Strangely, Restraint of Trade Agreements are not regulated in terms of labour legislation, although such agreements usually form part of the Contract of Employment.
X required Y to sign a Restraint of Trade agreement cause X felt it was necessary to restrain Y or limit her in her employment activities should she leave the service of her employer X. With regard to Y wanting to start his own business, the law clearly makes provision in the sense that when an employee (Y) is brought into close contact with the customers of X in such a way that it enabled Y to establish personal relations with the customers. (Y) Chose to leave her employment, Y may be allowed to take away some customers from her former employer X.
In the case of Roffey v Catterall , Edwards & Goudre the law preferred the sanctity and freedom of contracts in the sense that the certain basic rights can only be effectively exercised if the particular person can freely conclude agreements. The courts are usually less likely upholding a restraint between an employee and employer, because an employee restraint is effectively preventing an employee from working in his or her chosen field. If the restraint were too restrictive on Y, then the restraint would be against public interest thus it might be declared as being illegal and unreasonable.
In J Louw and Co (Pty) Ltd v Richter, 26 Didcott J stated that: “covenants in restraint of trade are valid. Like all other contractual stipulations, however, they are unenforceable when, and to the extent that, their enforcement would be contrary to public policy. It is against public policy to enforce a covenant, which is unreasonable, one, which unreasonably restricts the covenanter’s freedom to trade, or to work. Insofar as it has that effect, the covenant will not therefore be enforced. Whether it is indeed unreasonable must be determined with reference to the circumstances of the case. ”
This requirement arose where the X needed to protect his economic interests, trade secrets, secret formulas, price lists, customer database information, and so on. In other words, he needed to take certain action to ensure that such information will not fall into the hands of a competitor, should Y leave his service and take up employment with a competitor or start his own business. By analysing X’s intention one is able to pin-point out that X’s restriction is intended to exclude competition from Y as there are already over 20 other businesses that are already operating as estate agents in Windhoek.
It usually takes 2-3 months to sell a house in Windhoek. Thus X is not really protecting his legitimate interest, thus it is also against the public interest. With regard to the geographic condition laid out in the clause, it is unreasonable for X to enforce such a restraint on Y. The operation of the restraint in the area of 65 kilometres from Windhoek General Post Office covers six other municipalities. The other six municipalities are not in connection with the area that the X operates in, thus it is unreasonable for X wanting to apply the clause on Y.
The duration of the restraint of trade must not be overly long and must have some connection with the period of the connection with the period of the employee’s employment. This period will not be allowed to exceed 2 years. The restraint with regard to Y is for two years upon termination of Y’s employment from X and Y has worked for X for approximately 3 years. Thus, the period is reasonable, as the restraint is less than the number of years Y worked for X. Conclusion
In conclusion, in accordance to the law that people are free to trade and conclude contracts Y is therefore allowed to contract or start up her business or perform the occupation of despite it being in competition with her former employer, X. Allowing the restraint will prevent Y from performing her will of trade . Therefore, that Y is free to contract with whomever and whenever after the lapsing of his contract with his former employer, X. References Articles * Deloitte and Touche. Common Misconceptions about Restraints of Trade. 2004 Books * Basic Principles of Law A2vb.
Institute of South Africa * Deeksha Bhana. 2007. Students guide to the law of contract. Juta & Co. Cape Town, South Africa * Van der Merwe. 2007. Contract General Principles 3rd Edition. Juta & Co, Ltd. Cape Town, South Africa . Case Law * J Louw & Co ( Pty) Ltd v Richter. 243 * Magna Alloys & Research ( SA) Pty Ltd v Ellis 1984 (4) SA 8861 * Reeves v Marfield Insurance Brokers CC 1996 (3) SA * Roffey v Catletral l, Edwards & Goudre 1977 (4) 494 (N) 505F * Sunshine Records (Pty) Ltd v Froling 1990 (4) SA 782 ——————————————– 1 ]. Van der Merwe p212 [ 2 ]. Van der Merwe p212 – 213 [ 3 ]. Reeves v Marfield Insurance Brokers CC 1996 (3) SA 766 (A) 772 [ 4 ]. Law of Contract Study guide p102 [ 5 ]. Basic Principles of law A2vb. Institute of Bankers in South Africa p72 [ 6 ]. 1984(4) SA 874 (A) 894 [ 7 ]. Sunshine Records ( Pty) Ltd v Froling 1990 (4) SA 782 [ 8 ]. Deloitte & Touche Legal. Common Misconceptions about Restraints of Trade. 2004 [ 9 ]. 1977 (4) 494 ( N) 505F [ 10 ]. Magna Alloys & Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 8861 [ 11 ]. J Louw and Co (Pty) Ltd v Richter 243